When all else fails, throw a Hail Mary pass!!!!

PRENDERGAST v. SWIENCICKY, 2020 NY Slip Op 02686 (Appellate Division, Third Department, May 7, 2020)

The following Decision in an abridged version, which could potentially impact every Real Estate Attorney who represents a Client who, well after the ink has dried on the Contract of Sale, now decides that they do not want to close. So what do they do? They look to their Attorney to perform magic, or at the very least, throw a Hail Mary Pass into the end zone, hoping to find a receiver.

In this case, the Plaintiff entered into a standard form of Real Estate Contract to sell his house to the Defendant "as is," along with, among other things, a dining room set, for $395,000.00. Per the Contract, the Defendant tendered a $4,000.00 deposit that was held in escrow by the Defendant, Realty USA WNY, Inc. The Contract included a contingency that permitted a Structural Inspection. Notification of any substantial defects that would individually cost in excess of $1,500.00 to repair would trigger the cancellation of the Contract, but the provision allowed the Defendant the option of a 10-day deferral in cancellation "to provide the parties an opportunity to otherwise agree in writing." The Defendant provided notice of substantial defects that would allow cancellation, but the Defendant elected to defer the cancellation of the Contract by 10 days. A few days later, the Plaintiff provided written notice that she was unwilling to make any repairs or offer any concessions for the items found in the Structural Inspection but was willing to proceed "as is." The Plaintiff and the Defendant then proceeded to a scheduled closing, where the Plaintiff's Attorney presented payoff letters for the two Mortgages on the house, one of which was a Home Equity Line of Credit (hereinafter a “HELOC”). The Defendant appeared at the closing with several checks, including checks made out to the Mortgagees for the payoff amounts, but refused to tender the checks or close on the property.

The Plaintiff commenced this action alleging, among other things, Breach of Contract. The Court held, on Appeal, that the Supreme Court properly granted the Plaintiff Summary Judgment on her Breach of Contract claim. To establish her claim for Breach of Contract, the Plaintiff was required to prove that a Contract existed, that the Plaintiff performed her obligations under the Contract, and that the Defendant breached the Contract and that the Plaintiff suffered damages as a result. The parties acknowledge that they entered into a standard form of Real Estate Contract. Despite the Defendant having notified the Plaintiff that an Inspection revealed structural defects that would permit the Defendant to cancel the Contract, she exercised her contractual right to defer such cancellation for 10 days. During that period, the Plaintiff advised that she was not willing to make any repairs or concessions, but was willing to proceed with the sale "as is"; the Defendant avers that on the tenth day she withdrew her option to cancel the Contract and the Plaintiff agreed to proceed "without an Agreement to modify the Contract." The parties thereafter continued to proceed under the Contract. Thus, the parties agreed to be bound by the original Contract and, notwithstanding the Defendant's assertions to the contrary, the Defendant waived her right to demand concessions related to any of the defects revealed by the prior Inspections.

The Court held that when a party to a Real Estate Contract declares time to be of the essence in setting a closing date, each party must tender performance on that date, and a failure to perform constitutes a default. Thus, where a Seller seeks to hold a Purchaser in Breach of Contract, the Seller must establish that he was ready, willing, and able to perform on the time-of-the-essence closing date, and that the Purchaser failed to demonstrate a lawful excuse for his failure to close. The Defendant argues that the Plaintiff did not have a marketable title at closing, as she could only provide a marketable title, as required under the Contract, by providing a Satisfaction of each Mortgage Lien at closing. However, this position would necessarily have required the Plaintiff to pay off each Mortgage in advance of the closing and secure each Satisfaction, and, in our view, is inconsistent with both the Contract and the conduct of the parties.

It is significant that the parties used a Standard Form Contract for Purchase and Sale of Real Estate produced by the Capital Region Multiple Listing Service, Inc. Use of this Standard Form reflects the parties' intent to embrace the common practice developed over the years in the Real Estate Closing realm. This common practice with respect to the existing Mortgage Liens is as follows: the Seller obtains payoff letters from his respective Lenders, the Purchaser brings corresponding bank checks to the closing payable to each Lender, and either the Title Insurance Agent or the Seller's Counsel processes those payments to secure the required Mortgage Satisfaction. Within 30 days of receipt of payment, the Lenders are statutorily mandated to have a Mortgage Satisfaction presented for recording to the Recording Officer of the County where the Mortgage is recorded (RPAPL 1921 [1] [a]). This protocol is consistent with the reality that the pertinent closing documents, the Deed and the Mortgage Satisfactions, are recorded after the closing (Real Property Law § 291).

Here, the property was encumbered by two (2) Mortgages, a traditional Mortgage and a HELOC. Chase provided a payoff letter showing a balance due, pending receipt of payment and similarly, KeyBank provided a payoff letter specifying the amount due for the HELOC. Significantly, the KeyBank letter specifies in bold, underlined type as follows: "Please be advised that this account has been blocked from further advances". The record shows that the Plaintiff's Counsel provided the Defendant with copies of each letter with a calculation of the total amount due. The KeyBank letter also included a line for the Plaintiff to sign, which she did, stating, "I request KeyBank close my HELOC Account, and release its security interest in my property." The Plaintiff’s Counsel further provided the Defendant with prepared transmittal letters to overnight send checks to Chase and KeyBank, respectively, following the closing.

Under Paragraph 9 of the Contract, the Plaintiff was required to provide the Defendant with an updated 40-year abstract of title. The decision whether to obtain a Fee Title Insurance Policy was up to the Defendant. The record shows that the Plaintiff had the Title Abstract updated by Gifford Abstract Corp. The record also includes an E-Mail from Tom Gifford, a Title Insurer Underwriter, to the Defendant advising that he would personally attend a closing, if invited to attend. Gifford explained “that at the closing we mark up the Title Report and re-date it for the time of the closing. This serves as a Temporary Policy and shows the disposition of all the items. At this point the Mortgages will be omitted and you will be protected by the Title Insurance from the Lien of those Mortgages." Gifford further explained that he would take steps to issue a Final Policy within a week of the closing. As for the Mortgage Liens, Gifford advised that "at the closing we are prepared to accept Chase's and KeyBank's payoff letters and send checks to the Lenders by express mail that night, or the next day."

The Closing took place at the Offices of the Real Estate Broker. As it turns out, the Defendant declined to obtain Title Insurance and Gifford did not attend. The Plaintiff's Counsel did attend the closing and was prepared to process the Mortgage Payoffs. Significantly, the Defendant arrived with bank checks payable to KeyBank and Chase in the precise amounts as specified in the payoff letters. Nonetheless, the Defendant declined to close unless the Plaintiff agreed to further escrow funds in the amount of the two Mortgages and reduce the purchase price by $30,000.00. Notably, the Defendant came to the closing with only enough funds to pay the amount due if the Plaintiff agreed to provide the $30,000.00 credit. The Plaintiff declined to do so, and the closing fell through.

The foregoing shows that the Plaintiff provided the payoff documentation needed to pay the outstanding Mortgages and that the Defendant actually brought the appropriate bank checks to the closing. The Plaintiff's Counsel confirmed that he would forward payment directly to each Lender, securing the Defendant's right to a Discharge of the Mortgage Lien and the Plaintiff's right to be released from the underlying Mortgage debts. Upon receipt of the payment, each Lender was statutorily bound to have a Mortgage Satisfaction timely recorded. Moreover, the Defendant received written assurances from Gifford Abstract that a Temporary Title Insurance Policy would be provided at the closing, with a Final Policy to be issued within a week, even before the recorded Mortgage Satisfactions were returned by the County Clerk's Office. The concluding point is that the Defendant had documented assurance that the marketable title was being provided. Under these circumstances, we find that the Plaintiff duly performed under the Contract. The Defendant's refusal to complete the transaction constituted a Breach of Contract. As such, the Supreme Court properly granted the Plaintiff's Motion for Summary Judgment.

As for damages, the Plaintiff submitted an Affidavit stating that she paid at least $5,437.11 in Mortgage Interest and $7,028.08 in Real Estate Taxes. The Plaintiff also explained that she vacated the subject premises prior to the parties' Closing Date, which, of course, was necessary to provide full possession to the Defendant upon Closing. Correspondingly, the Plaintiff entered into a binding Lease Agreement for an apartment and had to dispose of most of her furnishings. The Supreme Court awarded the Plaintiff damages in the amount of $37,937.11, representing the difference between the parties' Contract price ($395,000.00) and the Contract price of the Plaintiff and the subsequent Purchaser. ($368,000.00 less $5,500.00 in Seller Concessions), plus the Mortgage Interest of $5,437.11.

Mulvey, J. (concurring in part and dissenting in part).

The Defendant argues that Title to the property would have been marketable and consistent with the Contract only if no recorded liens existed at the moment that the parties walked into the closing. The Defendant, who filed her brief Pro Se and did not always clearly or concisely articulate her arguments, asserts that Paragraph 10 of the Contract required the Plaintiff to deliver "marketable" title. That Paragraph states that the property will be delivered subject to, among other things, Covenants, Restrictions and Easements of record, "provided that nothing in this Paragraph renders the Title to the property unmarketable." Because Mortgage Liens are not mentioned in Paragraph 10, that Paragraph and its reference to marketability of title are not applicable here. Although the majority, apparently misled by the Defendant's mis-statement, also focuses on whether the Plaintiff was prepared to deliver "marketable" title, the Contract does not explicitly state such a requirement. Instead, the applicable Contract language appears in Paragraph 11, addressing the type of Deed required to transfer the property, as discussed below.

The Plaintiff relies on the common practice in the real estate industry wherein the Seller uses some or all of the proceeds of the sale to pay off any outstanding Mortgages and clear the Mortgage Liens. As correctly explained by the Majority, under that practice Counsel obtains a payoff letter from each Lender before the closing, obtains bank checks at the closing to cover the outstanding debts, and either the Seller's Attorney or a Title Agent delivers the checks to the Lenders with a request that a Satisfaction of Mortgage be executed and recorded. The Defendant asserts that this process places on the Purchaser the risk that the Lender will fail to record a Satisfaction, leaving a Lien on the property, which does not provide the Defendant with the assurances that she bargained for in the Contract.

On Dissent, the Court held that Paragraph 11 of the parties' Contract required the Plaintiff to transfer the property "by means of a Warranty Deed, with Covenant”. A written Agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms, and if the Agreement on its face is reasonably susceptible of only one meaning, a Court is not free to alter the Contract to reflect its personal notions of fairness and equity. The Legislature has provided statutory definitions for certain types of Deed Covenants or similar Covenants (Real Property Law § 253). A Covenant that the premises are free from encumbrances means that the title to the property is free, clear, and discharged from, among other things, all liens of any kind (Real Property Law § 253 [3]). This Covenant is similar to, or another name for, a Lien Covenant. A breach of the Covenant against encumbrances occurs, if at all, upon delivery of the Deed. Accordingly, it appears that the common practice of paying an outstanding Mortgage out of the proceeds of the sale while delivering the Deed at closing would result in a breach of a Lien Covenant from the outset, as the Mortgage Lien would still be on record at the time that the Deed is delivered. Although that breach would presumably be cured within a short time, when the Lender receives the payoff check and records a Satisfaction of Mortgage, the Covenant is breached at the time of closing. Hence, in these circumstances, the Seller cannot properly deliver at closing an un-breached Warranty Deed with Lien Covenant.

Some Courts have held that a Seller who is required by Contract to deliver marketable title at Closing may do so by paying the Mortgage out of the proceeds of the purchase price.[FN4] On the other hand, when a Mortgage has not been satisfied or the Satisfaction has not been recorded prior to a closing, there are certain standard practices that a Party or Title Insurance Company may follow to ensure unencumbered Title, including holding the Mortgage Money in escrow or delaying the Closing until the Satisfaction had been recorded or requiring the Mortgagee to appear at the Closing to personally deliver the Satisfaction of Mortgage upon payment. Indeed, a respected Treatise advises that if a Mortgage is outstanding, the prudent Practitioner should insist upon delivery of a proper Satisfaction, Release or Discharge in recordable form prior to acceptance of Title or procurement of Title Insurance against the Lien (2 Warren's Weed, New York Real Property § 25.09 [2020]).[FN5] Such cautionary practices are suggested because, if the Seller intends to satisfy an encumbrance out of the purchase price, this may result in loss either to the Purchaser or the Seller (2 Warren's Weed, New York Real Property § 25.10 [2020]). A Purchaser typically does not intend to shoulder this risk, which arises due to the Seller's financial situation. Although, upon receipt of payment, each Lender is statutorily required to timely record a Mortgage Satisfaction (see RPAPL 1921 [1] [a]), there is always a possibility that the Lender may not adhere to its Statutory Obligations. The question of which party bears the risk of that possibility was answered by the parties in Paragraph 11 of their Contract, which required the Plaintiff to deliver a Deed with all Liens satisfied.

Some Courts have determined in circumstances similar to the present case that, even where the Lender was present at the closing, the Vendor was unable to perform his obligations under the Contract. The Vendor might have expected to pay for the Release out of the Purchase Money, and thereafter to deliver the Release to the Vendee. But the Vendor was not entitled to receive the Purchase Money unless and until the premises were free and clear of all encumbrances noting that a Vendee cannot properly be expected to pay the entire purchase price in return for a conveyance of property encumbered by unsatisfied Liens of the Vendor using the Purchase Money to obtain the Satisfaction from the Lienor and to the Vendor thereafter turning the same over to him, because the Vendor had a duty to discharge the Encumbrances prior to the closing. This difficulty could have been avoided had a provision been inserted in the Contract that the Vendee was to advance the amount of the Mortgage to enable the Vendor to satisfy the same at the closing. Although parties to a Real Estate Contract may include provisions to address a situation in which the Seller will pay off a Mortgage with the Purchase Money, hold a portion of the Purchase Money in escrow until a Satisfaction of Mortgage is recorded or except such Mortgage Liens from the Lien Covenant, the Contract here does not contain any such provisions.

On the standard Form Contract, after saying that the Seller will transfer the property "by means of a Warranty Deed, with Lien Covenant," the form contains a blank that creates the option to insert another type of Deed. The parties were thus free to vary the Contract's terms but chose not to do so. They are therefore bound by the terms upon which they agreed. I understand that the Plaintiff relied upon the common practice, developed over the years in the real estate closing realm, of using the proceeds of a sale to pay off existing Mortgages. The Majority's Decision protects the long-standing customs in such circumstances. While I do not seek to disturb the typical course of real estate closings, and do not wish to upend the often-necessary practice of paying off Mortgage Liens with closing proceeds, I believe that it is more important to hold parties to the terms of their Contracts. Purchasers and Sellers, assisted by their Real Estate Brokers and Attorneys, who regularly handle such matters, may alter the terms of the form Contracts to reflect the nature of their individual circumstances. I cannot agree with the Majority that the use of a standard form Real Estate Contract necessarily incorporates the common practices in the real estate industry such that those practices are given more weight than the language of the Contract itself. In Contract Law, the unambiguous language of the Contract must prevail.

At the closing, the Defendant proposed an escrow option to await Satisfaction of the Mortgages, an option admittedly not included in the Contract, but which possibly could have permitted the closing to go forward despite the Plaintiff's failure to meet her obligation under the Contract to deliver a Warranty Deed with a valid Lien Covenant, but the Plaintiff was not willing to agree to such a condition. As the Plaintiff failed to fully perform her Contractual obligations because she did not deliver a Deed under the terms required by the Contract, she did not establish her Breach of Contract Cause of Action. Therefore, the Defendant was entitled to Summary Judgment dismissing that Cause of Action.

The Defendant also sought Specific Performance of the Contract. This demand is complicated by the fact that, after the parties' closing was unsuccessful, the Plaintiff sold the property to a subsequent Purchaser. Although Courts will generally not enter a Decree for the Specific Performance of a Real Estate Contract where the property has been conveyed to a third party, the remedy of Specific Performance may be available if the person to whom the Seller subsequently sold the property was not a good faith Purchaser for value.

As it was unclear, based on the information that was in the record before Supreme Court on the Summary Judgment Motions whether the subsequent Purchaser was a good faith Purchaser for value, this Court should remit for the Supreme Court to determine that issue. If the subsequent Purchaser was a good faith Purchaser, or if specific performance is otherwise not awarded to the Defendant, she should be entitled to return of her $4,000.00 down payment, with interest, because the Plaintiff was not ready to perform at closing. Accordingly, I believe that we should deny the Plaintiff's Motion for Summary Judgment on her Breach of Contract Cause of Action, dismiss the Complaint due to the Plaintiff's failure to perform under the Contract, and remit the matter to Supreme Court for further proceedings on the Defendant's Counterclaim.

ORDERED that the Order entered, and the Judgment entered thereon are affirmed, without costs.

Footnote 4: Contrary to the Majority, I render no opinion regarding the marketability of title to this property, or to any property under similar circumstances. Rather, I opine that the Plaintiff failed to strictly adhere to the provision in Paragraph 11 of the Contract that required her to provide at closing a valid "Warranty Deed, with Lien Covenant." It is therefore irrelevant that the Plaintiff provided "documented assurance that the marketable title was being provided," inasmuch as the Plaintiff did not fully satisfy her Contractual obligations.

Footnote 5: Although procurement of Title Insurance may provide protection against a Lien, the record contains competing information about whether the Defendant could obtain appropriate Title Insurance before the closing. In any event, while Title Insurance may have protected the Defendant's interests in the property, the Contract did not require her to obtain or bear the expense of it; under the Contract, the Plaintiff accepted the obligation to transfer title free of any Liens. Thus, the Majority's references to Insurability of Title, at Paragraph 9 of the Contract and the Defendant's failure to obtain Title Insurance are irrelevant.

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Let’s discuss this Decision. How and why did the Majority decide as it did? In my humble opinion, when the Defendant/Purchaser appeared at the closing with checks totaling $30,000.00 less than the Purchase Price, with the record disclosing that the Purchaser had every intention of paying $30,000.00 less for the real estate than the Contract of Sale so provided, without comment, that, no doubt, was the deciding factor for the Court finding the Defendant/Purchaser to be in Breach of the Contract. To find its way there, however, the Court had to dig its way through some of the Purchaser/Defendant’s obtuse Pro Se pleadings to come to that conclusion. It had to interject the fact that sometimes common sense and practicality have to play a part in bringing a real estate transaction to a final conclusion as to the procedural manner in which a Seller’s Mortgage Lien is satisfied. It so stated, in relevant part that the Court must also “embrace the common practice developed over the years in the Real Estate Closing realm”.

What is more troubling, however, is the language contained in the Dissent. While the Dissent ruled in concert with the Majority, in large part, it did, however, interject that the Contract, is the Contract, is the Contract, and there is no room to interject common sense and practicality in getting a deal closed when a Real Estate Contract is clear on its face. So, what would that otherwise require? It would require that for every Real Estate Transaction containing a Mortgage payoff, the payoff Lender would have to appear, in person, at every closing to exchange the payoff check for an original Satisfaction Piece, in recordable form, or alternatively, require that the Seller satisfy the Mortgage before the closing. Impractical? Most certainly, to say the least. Bear witness to how a Co-Op Loan is satisfied at every Co-Op closing. By analogy, where Title Underwriters are bending steel in order to get facilitate getting deals closed during the current pandemic and are relying on the use of a Gap Affidavit in order to insure good title, that concept would then be out the window, as no prospective Purchaser would be compelled to rely on a Gap Affidavit, and be compelled to close, if the Contract of Sale called for a Bargain and Sale Deed with Covenant Against Grantor’s Acts, or better. And while this was part of the Dissent, the thought is still out there. While the Defendant/Purchaser might have thrown a Hail Mary Pass in this instance, there was, most certainly, a receiver in the end zone who almost caught the ball. Attorneys, beware!